(Bloomberg Opinion) -- Want to end Western dependence on Russian natural gas? Buy a heat pump.
OK, OK, heat pumps alone won't do it. The International Energy Agency's new 10-point plan to cut European gas imports from Russia by more than 50 billion cubic meters (about a third of the 2021 total) over the coming year envisions that speeding up the replacement of gas boilers with heat pumps would eliminate just two billion cubic meters. The U.S., meanwhile, doesn't import any natural gas from Russia.
But that reduction in European gas use in 2021 can be repeated year after year after year as more heat pumps are installed, while heat-pump market share gains in the U.S. and elsewhere can free up natural gas to be exported to Europe, displacing Russian gas. Reducing dependence on Russia probably isn't the best reason to install more heat pumps, which can also reduce greenhouse gas emissions and cut consumer heating bills. It might, however, be a good excuse to accelerate a transition that's already gaining speed.
Heat pumps, which exchange heat between indoor air or water and outdoor air, water or soil, are so much more energy-efficient than other heaters that they reduce fossil fuel consumption even if the electricity that powers them is generated by burning fossil fuels. They've been available for decades and have achieved modest market penetration on both sides of the Atlantic — heating 6% of residential buildings in Europe, according to the European Heat Pump Association, and 11.5% of housing units in the U.S., according to the Census Bureau — albeit with huge regional differences. These differences are often chalked up to climate, but the fact that heat pumps' market share is highest in some of the coldest parts of Europe and warmest parts of the U.S. indicates that there must be more going on than that.
In the U.S., statistics aren't available for most states so there's little point in making a map, but the Census Bureau does have 2019 estimates of the percentage of housing units with heat pumps in all but two of the country's 15 largest metropolitan areas.
The Census Bureau hasn't released heat-pump estimates for metropolitan Chicago and Detroit because they either “did not meet publication standards” or were “withheld to avoid disclosure,” which indicates that the numbers must be tiny. The air-to-air heat pumps most common in the U.S., which are basically air conditioners that run hot as well as cold, historically haven't worked well when outdoor temperatures fall below 40 degrees Fahrenheit (4.4 degrees Celsius), which happens a lot in Chicago and Detroit, as well as in Boston, New York and Philadelphia. Ground-source heat pumps don't have this limitation but cost tens of thousands of dollars to install, which has limited their uptake in both the U.S. and Europe.
Still, it gets really cold in Finland, Norway and Sweden, and more than 90% of the heaters sold there are now heat pumps, most air-to-air. Technological progress is one big explanation — over the past few years manufacturers have begun to produce air-to-air pumps that deliver heat reasonably efficiently even when outdoor temperatures drop well below freezing. But history and custom and local market conditions clearly play a big role as well, which hints at great potential for growth if those barriers can be overcome.
In the sparsely populated Nordic countries, “there's no big gas grid and also very strong experience with electricity-based heating,” says Thomas Nowak, secretary general of the European Heat Pump Association. As heat pumps have become more efficient at lower temperatures, switching to them has thus been a simple choice. Meanwhile, California metropolitan areas where the temperature seldom drops below 40 degrees — perfect territory for even older-generation heat pumps — have natural gas distribution networks that date back to the state's days as an oil and gas powerhouse, and have been extremely slow to shift. Also, air-to-water heat pumps, which can be swapped in for gas or oil boilers that warm water for space heating (via radiators or baseboards or pipes in the floor) and tap and shower use, are common in China and Europe but quite rare in the U.S.
Cost is another factor. Heat pumps generate more energy in the form of heat than they consume in electricity, as much as three times more for air-to-air pumps and even higher for ground-source models. Conventional furnaces and boilers generate about as much heat energy as they consume in gas, oil or electricity. The air-to-air pumps usually don't cost more than furnaces or boilers either. But because natural gas is priced lower than electricity in much of the U.S. and Europe, heat pump operating costs can be higher, especially in colder climates.
One policy response to this is to impose carbon taxes that nudge the prices of natural gas and other fossil fuels closer to their full environmental cost. About 61% of electricity in the U.S. and 39% in Europe is generated by burning fossil fuels, so such taxes would raise electricity prices too, but as the fossil-fuel share continues to fall, electricity's pricing disadvantage would shrink. In any case, while such taxes and other carbon pricing mechanisms are on the rise in Europe, this approach remains a non-starter in the U.S.
Bans on new natural gas hookups, which have been put in place in some European countries and U.S. cities, will give a boost to heat pumps too, although in the U.S. they seem to be happening mainly in places with very little new housing construction. Without a push to install heat pumps in existing housing as well, they won't have much impact.
That leaves government subsidies, which have been having a big impact lately in some parts of Europe. In heat-pump laggard Germany, a new law that went into effect at the beginning of 2020 ended all aid for oil-and-gas heating-equipment purchases and provided grants covering 35% or more of the cost of climate-friendly heating systems such as heat pumps. Sales are up 75% since then.
In the U.S., where heat pump shipments are up by about a quarter over the past two years, there is a 26% federal tax credit for ground-source heat pump installations, which will drop to 22% in 2023. There was a $300 tax credit for installing Energy Star certified air-to-air heat pumps, but it expired on Dec. 31.
The version of President Joe Biden's Build Back Better Act that passed the House of Representatives last year included tax rebates of up to $4,000 for replacing other heaters and air conditioning systems with heat pumps, with added incentives for low-income households, multi-family buildings and contractors. While that bill may not have a future, there does seem to be enough Congressional interest right now in reducing dependence on Russian energy that the heat-pump subsidies might.
A more targeted approach proposed last year by the Collaborative Labeling and Appliance Standards Program, a Washington-based nonprofit, aimed to take advantage of the fact that 85% of central air conditioner replacements in the U.S. occur on an emergency basis, usually at the peak of summer. Air conditioners cost less and are simpler to install than heat pumps, so homeowners in this predicament usually opt for a new AC even though putting in a heat pump would reduce their heating costs as well as cooling the house. Paying manufacturers or distributors a subsidy that started at $400 to $500 a unit in the first year and declined thereafter would be enough to shift all those installations to heat pumps, the proposal's authors estimated, saving consumers $27 billion on their heating bills over 10 years and generating $80 billion or more in “additional societal benefits” from reduced pollution and greenhouse-gas emissions at an estimated cost to taxpayers of $3 billion to $12 billion.
Reducing dependence on Russian energy can now be added to that list of societal benefits. Unlike a lot of other actions to reduce energy dependence, switching to heat pumps doesn't require big lifestyle changes or environmental costs. There are some interesting entrepreneurial efforts afoot to make switching even easier, such as Dandelion Energy, which installs ground-source pumps at no up-front cost, and Gradient, which hopes to supplant window-unit air conditioners with low-profile heat pumps. The momentum for heat pumps is building, which means this is probably a great time to help it along.
More From Other Writers at Bloomberg Opinion:
- Reducing Dependence on Russian Energy Is Realistic: Liam Denning
- We Already Have a Solution for Oil's Price Shock: David Fickling
- The Oil Market Struggles to Fill a Russia-Size Hole: Javier Blas
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Justin Fox is a Bloomberg Opinion columnist covering business. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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